State Street sells stock, takes $3.7 billion charge

By Jonathan Stempel

NEW YORK (Reuters) - State Street Corp (STT.N) said it is selling $2 billion of stock and will also sell notes to help repay government bailout funds, and took a $3.7 billion charge to move some assets onto its balance sheet at a loss.

The Boston-based custodial bank and asset manager said it priced 51.3 million shares at $39 each. It also plans to issue debt not backed by the federal government.

State Street plans to use proceeds from the securities sales to help repay a $2 billion infusion from the Troubled Asset Relief Program. Issuing debt that does not have government backing is a requirement for paying back TARP.

Many banks want to repay TARP funds because of restrictions imposed by the government, including on executive pay, and because holding the funds is viewed as a sign of weakness.

State Street was among 19 large U.S. banks to undergo government "stress tests" of their ability to handle a deep recession, and was among nine found not to need more capital.

"The capital-raising is positive," said Murali Gopal, vice president at Keefe, Bruyette & Woods Inc in New York. "State Street is taking advantage of a run-up in its stock to raise capital, and who knows how long this run-up will last."

State Street shares have nearly tripled since hitting bottom on January 20, but are still down 44 percent since July amid worries about losses from investments and asset-backed commercial paper conduits, a special-purpose vehicle that holds receivables.

The $3.7 billion charge relates to unrealized losses on $22.7 billion of assets from the conduits, which State Street is now moving onto its balance sheet. In February, the bank slashed its dividend and reduced bonuses to bolster capital.

State Street's charge, equal to about $7.70 per share, will help the company "ensure that capital issues are behind them," wrote Goldman Sachs & Co analyst Brian Foran. "It makes sense to put the issue to bed."

State Street shares closed at $3.28, or 8.5 percent, higher at $41.79 on Monday. Foran raised his 12-month share price target to $45 from $25. KBW's Gopal rates the bank "market perform."

Net proceeds from the offering will be about $1.9 billion and as much as $2.2 billion if the underwriters exercise options to buy more shares, State Street said in a statement.

BACK TO BASICS

State Street on Monday projected 2009 operating profit of $4.25 to $4.50 per share, including 75 cents per share from interest revenue from the conduit assets.

Excluding the boost from interest revenue, the forecast is below analysts' average estimate of $3.80 per share, according to Reuters Estimates.

State Street said its forecast reflects a "marginally weaker" environment than expected, and assumes a 12 percent drop in operating revenue and a 17 percent return on equity.